GEM Modeling of Continuous Equilibrium Unemployment

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It will comfort practitioners that, unlike market-centric modeling, LEV workplace equilibrium does not simultaneously determine the rational wage and level of employment. The central innovation in large-firm management of labor input is the substitution of the workplace-exchange relation for market labor supply in optimizing employer-employee interaction. (Chapter 2) That baseline labor-input supply schedule, on its own, determines the rational wage, making labor pricing demand-independent.

LEV management also identifies its production schedule, with its particular levels of labor hours, capital services, and material input, as a function of expected product demand subject to rational profit seeking. As a result, labor input is recognizably adjusted over the business cycle. Given that labor hours available for production (HJP) are increasing in the level of employment (HJP=ƒ(EJ), such that ΔHJPEJ>0), rising product demand relatively quickly pushes firms to hire more workers, a process that is influenced by overtime premiums as well as physical/socioeconomic constraints on the length of the workweek. Opposite-direction adjustments (reduced workweek, layoffs and job downsizing) were modeled in Chapter 3.

Given WJ=WnJ=WńJ, labor input that is in 1:1 correspondence to production can be measured by worker hours. Chronic wage rent combines with the substantial pool of SEV employees to produce an elastic market-supply schedule to LEV firms at their profit-maximizing wage (WnJ). Large establishment employment determination is consistent with the GEM Project’s reorientation of macroeconomics to feature powerful causation from nominal demand disturbances to same-direction changes in employment and output.

Involuntary job loss requires the suppression of wage recontracting and is, therefore, confined to LEV firms with their characteristically unbundled Ź. If SEV labor pricing and use is not government restricted, TVGE economies tend to generate relatively robust total employment, while being vulnerable to socioeconomic problems rooted in earnings inequality not meaningfully grounded in inherent ability or generally acquired human capital.

In the LEV (workplace) sector, the familiar market-clearing conditions break down. Posit that current production (XJ) is equivalent to demand-determined sales and that XJ<XJS, where XJS becomes notional supply. The profit-maximization problem, as described by Patinkin (1956), is then restricted to selecting the minimum labor hours needed (HJD’) to produce XJ. Profit maximization implies that: HJD’=FJ-1(XJ), for δFJHJWJR. It follows from the constraint XJ<XJS that HJD’<HJD, with HJD’ approaching HJD as XJ approaches XJS. An effective-demand shock ΔHJD’<0 forces involuntary job loss. It also follows that the effective demand for LEV labor services (HJD’) can vary despite unchanged WJR. The market breakdown is Keynesian (i.e., involuntary job loss resulting from combining inadequate demand and wage rigidity) rather than classical (i.e., persistent unemployment wholly caused by excessively high real wages).

TVGE continuous-equilibrium unemployment is rooted in the independence of LEV wages from rational labor-market exchange. Any estimated correlation between LEV labor pricing and labor-market conditions largely results from collinearity between the latter and overall product price inflation. Indeed, counter to coherent SVGE macroeconomics, TVGE causation typically runs from wages to unemployment: (i) from MWR to layoffs (cyclical unemployment) via adverse high-frequency shifts in nominal demand and (ii) from MWR to job downsizing (producing more persistent market joblessness) via lower-frequency nominal disturbances. Further complexity in the generalized-exchange relationship between nominal labor pricing and unemployment results when low-frequency job destruction induces wage givebacks via the long-lagged rational recalibration of employee reference standards (ҜJ) modeled in Chapter 3.

Blog Type: Wonkish Saint Joseph, Michigan


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